New Report Proposes Replacing Federal Student Loans with an Income-Share Agreement

A federal ISA would be simpler and more progressive than the current system

NEW YORK, NY — The current federal student loan program is due for an upgrade, prompting some presidential hopefuls to suggest simply making college free. A better approach, according to a new Manhattan Institute report by expert Jason Delisle, would be to replace the federal loan program with an income-share agreement (ISA). Rather than navigate an unclear system of loans, repayment plans, and varied interest rates, a federal ISA would completely streamline the process of paying for college.

The latest in the Manhattan Institute’s “Solutions from Beyond the Beltway” series, the report explains how the current federal student loan program is needlessly complex, fails to offer an effective safety net for borrowers in financial difficulty, and distributes the largest benefits to borrowers who need them the least. In comparison, the proposed federal ISA would simplify the system by offering all eligible students with a $50,000 line of credit, with repayments made as a small fraction of earnings paid directly via income taxes.

The proposed plan would maintain several of the existing features of the current system, including universal eligibility and time limits on repayment. But it would improve many other elements, including:

• It is radically simpler than the existing program;
• The borrowing limits are universal and transparent;
• There are no interest rates or rising balances;
• Payments are set in a straightforward manner and track income in real time without borrowers having to undertake an annual application process; and
• Defaults and delinquencies will be rare, not rampant.

Click here to read the full report.